Accessing credit is difficult for businesses in the Pacific. While there’s enough liquidity in the banking system, the ratio of private sector credit to GDP is in most cases less than 50 percent— similar to the level in many South Asian and South American countries.
In developed or fast-growing economies it is typically around 100 percent. Reasons for the lack of credit include the difficulty in using land as collateral, a lack of financial records, and poor business skills. Whatever the root cause, business cannot grow without credit, and employment, income growth, and living standards are constrained.
Government-sponsored credit guarantees are often promoted in the Pacific as a way of overcoming the lack of lending. The logic is straightforward: if the government agrees to repay some or all of a loan in the event of default, lenders will be more willing to lend and access to credit will increase.
But the rationale for guarantee schemes can be challenged on several fronts. The experience to date of the Pacific with these schemes does not make a compelling case for extending their use. In fact, they stand in the way of reforms which could resolve the underlying issues that inhibit lending.
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